Venture Math in Defense - Part I: Investibility
Marque Ventures Managing Director, Jake Chapman, breaks down the math for venture capital investments in the defense startup space with Eric Tegler for Forbes.
“Part of my presentation to [DoD managers] is the venture math because I want them to understand where VCs are coming from,” Chapman says. “When they ask a VC to invest in a business and are surprised when that VC doesn’t invest, I explain the reasons why.”
The article highlights the typical distribution within a VC portfolio - a third of the investments might fail, another third might break even or incur minor losses, and the remaining third is expected to generate substantial returns. This distribution can be even more pronounced in the defense sector, where the stakes are higher.
A significant challenge in the defense industry is the nature of exits, primarily through mergers and acquisitions. Defense contractors, the usual acquirers, value startups at lower multiples than tech businesses. This valuation gap necessitates startups to aim for even higher returns, which can be daunting for many founders. However, there's a positive shift emerging. Mature defense tech startups, such as Anduril and Shield AI, are beginning to offer higher valuation multiples, similar to those in the tech industry. This trend creates new exit opportunities for defense startups, potentially attracting more venture capital.
For defense startups and DoD organizations, understanding venture capital mathematics is not just an academic exercise; it's a strategic necessity.
Recognizing the high-stakes environment in which VCs operate can guide startups in crafting pitches that align with these investment dynamics. For government agencies, this knowledge can aid in creating policies and support mechanisms that better align with the realities of venture funding.
As the defense sector evolves, so must our understanding of the financial forces shaping its future.